Gross…

Bill Gross and Pimco are synonymous.  When the ‘Bond King’ surprised the financial world and left the firm he founded and the bond fund he turned into the largest in the world, many were worried that with his exit the firm and the Total Return fund would not see the outsized returns that made him famous.  While no one can predict how the fund will do with new managers moving forward, the fact that there is such large concern over one person at a mutual fund company with over $2 trillion in assets under management raises the issue of manager driven returns vs. market driven returns.

RWM’s investment approach doesn’t rely on star managers. We believe broad market exposure will drive long term results.  With the market leading the way – we then look to add value by tilting towards small cap stocks and stocks with a value orientation and relatively shorter term and higher quality bonds.

We then seek managers who deliver this “market – driven” strategy as precisely and efficiently as possible.  We are not chasing a famous name, but targeting a specific asset allocation strategy.  This means the investment strategy is not susceptible to angst and large turnover if a famous portfolio manager leaves a fund.

One also doesn’t know at the time who will be the next star manager and it’s likely that last year’s or last decade’s star manager won’t continue to see such strong performance into the future.  So not only does one need to identify the star manager – they need to be found early enough for an investor to benefit from their outperformance, a very difficult task.  As can be seen below, equity funds that outperform their benchmark are unlikely to see that past out performance continue into the future.

The below chart depicts the amount of funds that existed in an initial time period, the percentage that outpaced their benchmark over the initial period, and of those that outpaced their benchmark how they performed compared to their benchmark over the ensuing 3 years.

Past Performance vs. Subsequent Performance

 Chart for Blog

 

There are multiple potential issues with relying on a star manager to pick securities.  By relying on a market driven approach one can expect a more dependable experience with your portfolio.

 

Index Performance                                       Sept.   QTR.    YTD     Trl 1 yr.

US Stock (Russell 3000)                                   -2.08%   0.01%    6.95%    17.76%
Foreign Stock (FTSE AW ex US)                     -4.70%  -5.03%   0.63%      5.41%
Total US Bond Mkt. (BarCap Aggregate)       -0.68%   0.17%    4.10%     3.96%
Short US Gov. Bonds (BarCap Gov 1-5 Yr)     -0.16% -0.04%   0.73%      0.67%
Municipal Bonds (BarCap 1-10yr Muni)         -0.06%  0.84%    4.07%     4.40%
Cash (ML 3Month T-Bill)                                   0.00%   0.01%    0.03%     0.05%

 

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

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